Controlled Foreign Companies: Tax Obligations, Risks, and Case Law

The introduction of Controlled Foreign Companies (CFCs) has become a cornerstone of Ukraine’s de-offshorization reform. Following the implementation of Article 39-2 of the Tax Code of Ukraine on January 1, 2022, the State Tax Service (STS) significantly intensified its monitoring of foreign structures in 2024–2025 — including through the Common Reporting Standard (CRS) automatic exchange of tax information.

What a CFC Is and Who Controls It

A Controlled Foreign Company (CFC) is any legal entity registered outside Ukraine that is controlled by a Ukrainian tax resident, either an individual or a legal entity. Registering as a sole proprietor abroad (analogous to a Ukrainian FOP) without forming a legal entity does not constitute a CFC. Control may be formal (ownership) or factual (effective influence).

A Ukrainian resident is deemed a controlling person if he or she:

• owns more than 50% of the company; or
• owns more than 10%, where Ukrainian residents jointly own 50% or more; or
• exercises factual control — for example, gives binding instructions to management, negotiates major contracts, disposes of assets or profits, or manages bank accounts.

Thus, formal ownership is not decisive: factual influence alone may establish control. If the tax authority proves that a resident effectively directs the company’s activities, that person is recognized as a controller even without any declared ownership interest. The burden of proof rests with the tax authority, but in practice, the resident must be able to document the absence of control.

Reporting Obligations

A controlling person must notify the STS of acquiring or losing control over a CFC within 60 days. The notification is submitted electronically via the taxpayer’s online account. In addition, an annual CFC report must be filed, detailing ownership structure, income, profits, taxes paid abroad, and transactions with related parties.

Financial Liability: Numbers That Matter

Violations of CFC reporting rules carry substantial penalties.

• Failure to file a notification — 300 living wages (in 2025, about UAH 908,400 per CFC).
• Failure to file a report — 100 living wages (UAH 302,800); late filing — up to UAH 151,400.

Separate fines apply for unreported income or profit: 3% of income or 25% of adjusted profit, whichever is higher, and additional penalties for prolonged non-submission. Even a formal delay or omission regarding one CFC can cost hundreds of thousands of hryvnias.

Judicial Practice: How Tax Authorities Prove Control

Court practice in 2024–2025 shows that tax authorities are actively investigating both Ukrainian residents and their foreign structures.

In the Third Administrative Court of Appeal (Case No. 280/3288/24, October 16, 2024), a Ukrainian citizen who moved to Germany for permanent residence was still recognized as a Ukrainian tax resident, despite temporary protection status. The court confirmed the STS position: staying abroad for more than 183 days does not terminate residency if the person retains significant ties to Ukraine — property, family, or business.

Another case — Eighth Administrative Court of Appeal, July 2, 2025 (Case No. 140/717/25) — involved a Ukrainian resident who established an Estonian company, Viridis Oleum OU, and managed it from Ukraine. The court upheld the STS decision that such management constituted an unregistered permanent establishment (PE) in Ukraine.

Even though CFC reports had been submitted, management from Ukrainian territory equaled PE activity, justifying profit tax reassessment and penalties.

Taxation of CFC Profits

The taxable base is the share of adjusted CFC profit proportional to ownership or control. If the CFC pays corporate tax abroad, that amount may be credited against Ukrainian tax, but not exceeding the domestic liability.

Example:

• A CFC in Bulgaria earns a profit of 1 million leva (≈ UAH 21 million). It pays 10% corporate tax — 100,000 leva (≈ UAH 2.1 million).
• The Ukrainian controller owes 18% personal income tax plus 1.5% military levy (≈ UAH 3.7 million), from which the UAH 2.1 million foreign tax is deducted, leaving ≈ UAH 1.6 million payable in Ukraine.

Tax Exemption Conditions

A CFC’s profits may be exempt from Ukrainian taxation if:

• there is a double taxation treaty or information exchange agreement between Ukraine and the CFC’s jurisdiction; and
• at least one of the following applies:
• effective tax rate ≥ 13%;
• passive income ≤ 50% of total income;
• total CFC income of one person ≤ EUR 2 million;
• the CFC is a public company or a charitable/discretionary irrevocable trust.

Case Law on Beneficial Ownership

In the Fifth Administrative Court of Appeal (Case No. 400/2227/24, November 27, 2024), the court reaffirmed that to apply a reduced treaty rate, the recipient of income must be the beneficial owner, not a conduit. Cyprus-based Ukrfarm Funding Limited acted as an agent for Standard Bank Plc, thus lacking economic benefit. The court agreed with the STS that the 15% tax rate was lawful.

This aligns with Supreme Court precedents in cases Nos. 804/4659/15, 826/10189/18, and 540/726/20.

Conclusions

Ukraine’s CFC regime is now fully operational. CFC reporting is mandatory, not optional. Factual control outweighs formal ownership, and reporting does not guarantee tax exemption. Managing a foreign company from within Ukraine may be deemed permanent establishment activity, leading to profit tax reassessment and fines.

The sanctions are real: even a small reporting mistake can cost a business hundreds of thousands of hryvnias. Continuous monitoring of corporate structures and tax residency is now an essential element of financial risk management.